Cooperman's Omega Clocks 27 Percent Gain

November 26, 2012   Stephen Taub

Despite being displaced from their downtown Manhattan offices since Superstorm Sandy, Leon Cooperman and his team at Omega have continued to generate strong returns this year.

Three weeks after Superstorm Sandy devastated the northeast, Leon Cooperman is still homeless.

To be clear, his home in New Jersey was not affected. But the Omega Advisor founder’s offices at 88 Pine Street, just south of the South Street Seaport in lower Manhattan, are a different story. That part of the city was flooded with 35 feet of water during the storm.

Cooperman and his 40 employees and consultants at Omega Advisors are still scattered around the tri-state area, with Cooperman and about  five other people working out of Goldman Sachs offices at 120 Broadway, another dozen from unused space at UBS (not its main office) and still others working from their homes. Cooperman estimated just before Thanksgiving that he would be allowed back in his offices by the Board of Health in 10 days to two weeks, although it still has no phone service. Verizon has given him no estimate as to when he can expect the phone lines to be restored.

But Cooperman wants people to know he is not complaining. "Our problems pale in comparison with people who were wiped out," he says. "It is an inconvenience."

Omega has not missed a beat, however. The fund, founded in 1991, had $7 billion under management at the end of October and was up about 27 percent through the third week of November, making it one of the year’s best hedge fund performers. The firm has earned gains from positions in structured credit, coupled with good stock selection and a large net long position because Cooperman felt stocks were cheap earlier in the year.

Some of his biggest holdings this year have done very well. For example, Sallie Mae, his largest position earlier in the year and his second largest at the end of the third quarter, is up 26 percent year-to-date. AIG, his largest holding at the end of the third quarter, is up over 40 percent, while Apple is up over 38 percent.

While Cooperman still thinks now is a good time to be an equity investor, he is still mindful of the macro picture. Like everyone, Cooperman is now closely watching how Washington deals with the so-called fiscal cliff. He says Congress and Obama need to sit down and figure out what the proper marginal tax rate should be for wealthy people, and then size the government to reflect the new tax flows. He also believes the government should institute some sort of VAT (value-added tax).

On the spending side, he emphasizes the need to get health care costs under control and advocates raising the eligibility age for receiving Social Security to 70, except for individuals who are engaged in what he calls "hard labor," a proposal he advocated more than a year ago.

Will lawmakers in Congress make these kinds of hard decisions and avoid the market and economic catastrophe that many are predicting? Cooperman thinks they will. "The folks in Washington are not that moronic," Cooperman says.

The fiscal cliff issue does not really affect how he invests, he says. Cooperman generally feels the market is in a zone of fair value. And he expects the market will remain in a trading range for the next two to three years until there is a meaningful deal to de-leverage.

But this does not mean investors can’t make money during that period. To emphasize his point, he notes that the Dow Industrials traded at the same level the day he began working in early 1967 right after graduating from Columbia Business School and 15 years later.

More recently, he points out the S&P 500 stood at 1527 in March 2000 when the market peaked and at 1565 in October 2007 and is currently trading at 1388. Yet, during the intervening time, he has been able to make a lot of money.

"The good news is stocks are the best house in the financial asset neighborhood," he has been saying for some time now, noting that cash is essentially paying zero, U.S. government bonds are trading to yield just 1.7 percent — which he calls "a farce" — and even spreads on junk bonds have tightened to record levels compared with comparable government bonds.

Equities are trading below their historical valuation and are cheap compared with fixed income and cash, he says. Emphasizing that he is a bottom-up investor, Cooperman says his favorite sectors are health care, energy and financials.

Although he won’t name specific names, you can bet Verizon is not among them.

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